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The Comprehensive Guide to Semiconductor ETFs

Worldwide, the semiconductor industry serves as the backbone for technological advancement. The industry has also experienced tremendous growth attributable to the torrid rise in demand for semiconductor devices around the world.

Not only has the space been quickly growing, but it has witnessed a transformation of sorts lately, as the companies reshuffled operations with the intent to shift routine productions to low-cost areas. This change led to the development of the Asian market which is now into memory production and backend operations.

However, the global financial meltdown in 2008 had a devastating impact on the industry largely thanks to slowing growth prospects and worries over consumer confidence. Globally, semiconductor devices reported sales of $299.5 billion in 2011, growth of just 0.4% from 2010 levels and a far cry from the 2010 growth rate of over 31%.

Meanwhile, the Semiconductor Industry Association (:SIA) had earlier projected growth of 6% for 2011, but in December, the expectation was slashed to 1.3% while the actual was even less than that.

Semiconductor Sector In Focus

Within the semiconductor industry, computing and consumer electronics play a major role in the overall sector performance. The two markets cumulatively contribute around 60% to the total industry sales.

North America is expected to be flat, while both developed Asia/Pacific countries and Western Europe are expected to decline. The products that would drive growth are tablets (up 59%), smartphones (22%), home audio (5%) and mobile PCs (3%).

Commoditization and pricing pressure in the computing market have been big problems and continue to be issues but we are seeing moves away from that thanks to intense segmentation. This has allowed for more specialization in the semiconductor space and thus wider ‘competitive moats’ for many firms in the industry as well (Three Great Tech ETFs That Avoid Apple).

Also, growth in the data center segment has contributed enormously to this sector. Add to this the overall sales of semiconductor devices with its increased focus on servers, storage and networking equipment which use semiconductors of the high-end variety.

Semiconductor sales as we’ve seen have shown a modest growth in 2011. The trend is expected to continue this year, while 2013 would likely be a year of stronger sales. However, the macroeconomic condition still remains a matter of concern.

Some investors have shown avid interest in the semiconductor sector. For investors seeking to play this trend in exchange traded funds (ETFs), there are a variety of semiconductor ETFs offering excellent exposure. Below, we discuss briefly some of the many funds which fall in this sector, any of which could help investors gain targeted exposure to the space.

Market Vectors Semiconductor ETF, which was converted from the HOLDRs platform late in 2011, is one of the more popular ETFs in the segment. The product is a non-diversified fund providing exposure to just 26 semiconductor companies thereby offering extremely concentrated exposure.

The fund has an asset base of $340.5 million of which it allocates nearly 21% of its assets to Intel Corporation (INTC) while also giving Taiwan Semiconductor Manufacturing Co. Ltd. (TSM) and Texas Instruments (TXN) weights of 12.9% and 6.8%, respectively (Intel Report Crushes Semiconductor ETFs).

This ensures that SMH offers investors a highly-concentrated bet on large caps. Though broad exposure will not be achieved, this means that the underlying securities will be extremely liquid. SMH is rich in volume at 1,715,394 and charges an expense ratio of 35 basis points. The fund has added about 5% since the conversion.

Just after SMH, iShares made an attempt to provide an exposure to U.S. semiconductor stocks through PHLX SOX Semiconductor Sector Index Fund. The fund is a non-diversified ETF that tracks the PHLX Semiconductor Sector Index offering exposure to a small basket of 31 semiconductor companies.

Like SMH, the fund is heavily invested in the top 10 holdings investing 62.2% of the asset base of $213.4 million in those companies. The fund gives its top weighting to Intel, allocating 9% to the company. In addition to Intel, other top weightings go to Taiwan Semiconductor and Broadcom Corp (BRCM).

The fund seems to be not as popular as SMH as the trading volume stands at 191,100, much lower than SMH. The lower volume of the fund can be attributed to a somewhat higher expense ratio of 48 basis points and SMH’s solid market position. In addition to the higher expense ratio and lower volume, the fund delivered a return of -7.9% over a period of one year.

Investors looking for a broader space for investment in the semiconductor sector should look to XSD. The fund tracks the S&P Semiconductor Select Industry Index which represents the Semiconductor sub-industry portion of the S&P Total Markets Index. The index also uses a modified equal weighting system, thereby giving equal weighting to small caps. (Small Cap Value ETF Investing) The fund has an asset base of $34.18 million.

The fund invests in a larger basket of stocks compared to SMH and SOXX, giving exposure to 50 semiconductor companies. Also, unlike the first two funds, XSD does not offer concentrated exposure, investing just 27% in the top 10 holdings, thereby spreading the asset base in other companies as well.

Additionally, XSD doesn’t give the top portion to Intel, instead allocating higher weightings to Cirrus Logic Inc. (CRUS) and Skyworks Solutions Inc. (SWKS). For this diversified and less concentrated exposure to semiconductor companies, the fund charges an expense ratio of 35 basis points. However, over a period of one year, the fund delivered a negative return of 23.1%.

For a slightly more active approach in the industry, PSI could be an intriguing choice. The fund tracks the Dynamic Semiconductors Intellidex Index which is designed to provide exposure to the semiconductor space by thoroughly evaluating companies based on a variety of investment merit criteria, including fundamental growth, stock valuation, investment timeliness and risk factors.

Like other funds, this fund also provides a very narrow exposure to semiconductor stocks. PSI holds a small basket of 30 stocks. The fund invests 41% of the asset base of $18.4 million in top 10 holdings. Broadcom Corp and Qualcomm (QCOM) occupy the top two positions in the fund while Intel takes the sixth position.

The fund appears to be expensive when compared to many others as it charges an expense ratio of 63 basis points. PSI delivered a negative return of 13.6% over a period of one year.

The Direxion Daily Semiconductor Bull 3x ETF seeks daily investment results, before fees and expenses, of 300% of the performance of the PHLX Semiconductor Sector Index. The Semiconductor Index measures the performance of the semiconductor subsector of the U.S. equity market (read Understanding Leveraged ETFs).

As of March 31, 2012, the Semiconductor Index included companies with a median market capitalization of $7.1 billion. The average capitalization of the companies comprising the Semiconductor Index was approximately $14.3 billion.

The fund holds a total of 30 semiconductor stocks. The fund delivered a return of negative 41.9% over a period of one year. The fund charges an expense ratio of 95 basis points.

The Ultra Semiconductors ETF seeks daily investment results, before fees and expenses, of 200% of the performance of the Dow Jones U.S. Semiconductor Index. The Dow Jones U.S. Semiconductor Index measures the performance of the semiconductor subsector of the U.S. equity market.

The Index holds a total of 45 semiconductor stocks, with Intel coming in with the most assets. The fund delivered a return of negative 18.3% over a period of one year and it charges an expense ratio of 95 basis points a year.

The Direxion Daily Semiconductor Bear 3x ETF seeks daily investment results, before fees and expenses, of 300% of the inverse performance of the PHLX Semiconductor Sector Index. The Semiconductor Index measures the performance of the semiconductor subsector of the U.S. equity market.

Recently, the Semiconductor Index included companies with a median market capitalization of $7.1 billion. The average capitalization of the companies comprising the Semiconductor Index was approximately $14.3 billion.

The fund holds a total of 30 semiconductor stocks. The fund delivered a return of negative 30.2% over a period of one year but charges investors 95 basis points a year in fees.

The UltraShort Semiconductors ETF seeks daily investment results, before fees and expenses, of 200% of the inverse performance of the Dow Jones U.S. Semiconductor Index. The Dow Jones U.S. Semiconductor Index measures the performance of the semiconductor subsector of the U.S. equity market.

The Index holds a total of 45 semiconductor stocks, with Intel being the top choice for investment. The fund delivered a return of negative 14.7% over a period of one year and charges an expense ratio of 95 basis points. (Three All-Star Leveraged ETFs)